A Factor Framework for Cross-Sectional Price Impacts

Abstract

We propose a framework in which noise trading flows impact cross-sectional asset prices through risk factors. In the model, asset-level flows, when aggregated at the factor level, drive fluctuations in factor risk premia. The factors’ price impacts in turn drive the cross-section of asset prices. Empirically, the model explains both self and cross-asset price impacts with a few risk factors. The model-implied trading strategy, designed to exploit the subsequent reversion of flow-induced price impacts, delivers strong and robust investment outcomes and improves the performance of a wide range of anomalies.

Presentation

Notre Dame, Johns Hopkins Carey, RUC-VUW Joint Virtual Research Workshop, 6th Annual Wolfe Global Quantitative and Macro Investment Conference, Federal Reserve Board, Campbell & Company, MFA Annual Meeting 2023, Southern Methodist University, FMCG 2023, SoFiE 2023 Conference, CICF 2023, Chinese University of Hong Kong, City University of Hong Kong, 10th SAFE Asset Pricing Workshop, UT Dallas 2023 Fall Finance Conference

Award

Financial Markets and Corporate Governance Conference Runner-up for Best Paper

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